ESG Ratings Explained

ESG ratings estimate a company’s exposure to environmental, social, and governance risks and the quality of its risk management. Below is a practical overview of common providers, scoring systems, and limitations to keep in mind.

Major Providers and Scales

MSCI

Uses letter grades from CCC to AAA. Higher is typically better. MSCI focuses on financially material ESG risks by industry and assesses how effectively a company manages them.

Sustainalytics

Uses a 0–50 risk score where lower is better. Categories: Negligible (<10), Low (10–<20), Moderate (20–<30), High (30–<40), Severe (≥40). Emphasizes unmanaged ESG risks relative to peers.

ESG Enterprise

Typically uses a 0–100 score where higher is better. Combines environmental, social, and governance indicators into a composite measure with periodic updates.

How to Interpret Scores

Compare companies within the same industry; cross-industry comparisons can be misleading.
Ratings are estimates based on disclosed and third‑party data; data gaps and delays are common.
Different providers can disagree due to methodology differences—consider multiple sources.
ESG ratings are not investment recommendations; integrate financial analysis and risk tolerance.

Caveats and Limitations

Ratings can change as new information is disclosed or controversies emerge.
Disclosure quality varies widely by region and company size.
Some metrics are subjective; governance and social assessments may rely on proxies.
Use ratings as one input among many when constructing a portfolio.